Trading in the forex market, it will always involve two currencies at a time.
These two currencies are referred to as ‘currency pairs’ and they’re made up of the base currency and the quote currency. The difference in price is where you’ll make your profit or loss.
The currency that is listed first is called the base currency, and the currency listed second is called the quote (or counter) currency.
For example, for the currency GBP/USD, GBP is the base currency and USD is the quote currency.
This is the first currency set that appears in the forex pair. It’s the one that’s bought or sold for the quote currency. In the example above, the GBP is the base currency.
This is the second currency that appears in the pair, and is also known as the ‘counter currency’. In the example above, the USD is the quote currency.
There are three categories of currency pairs:
While you can trade almost any currency pair in theory, there are certain pairs that are consistently the most traded. These are referred to as ‘major pairs’ or ‘majors’. These major pairs make up 80% of the entire trading volume in the forex market.
Some examples of major pairs includes: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD.
In forex trading, the various combinations of currency pairs have developed their own nicknames. Check them out below!
Currency pairs that do NOT include the U.S. dollar (USD) in their pairing are known as cross-currency pairs or simply as the crosses.
The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.
Fun fact: Back in the old days, if someone wanted to change currencies, they would first have to convert their currencies into U.S. dollars, and only then could they convert their dollars into the currency they desired.
Exotic… you’re probably thinking exotic countries and exotic belly dancers, but let me stop your imagination there. The label has nothing to do with the location or size of the country (or the number of belly dancers) where the currency is used.
Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico, Chile, Turkey, or Hungary.
A benefit to trading exotic pairs is that they may offer higher potential returns due to wide price fluctuations. However, this means they are riskier to trade.
Wanna take a guess what those other currency symbols stand for? Good luck!
The chart below contains a few examples of the Exotics.